The State of Stablecoin Yields: A Comprehensive Overview
Stablecoins, a unique class of cryptocurrencies, have emerged as a pivotal component in the digital asset ecosystem, offering a bridge between the traditional financial world and the innovative realm of decentralized finance (DeFi). These digital assets are designed to minimize price volatility by being pegged to a reserve of assets, typically a fiat currency like the U.S. dollar, or other stable assets such as gold. This stability has made them an attractive option for investors and traders looking to escape the wild price swings often associated with cryptocurrencies like Bitcoin and Ethereum.
Stablecoins have found their niche in the DeFi landscape, serving as a reliable medium of exchange, a store of value, and a unit of account. They have become the backbone of many DeFi applications, enabling activities such as lending, borrowing, and yield farming. However, the yield generated from these stablecoins has been relatively low in recent times, especially since the Terra incident, with returns generally hovering below 3–5%. This article aims to provide a comprehensive overview of the current state of stablecoin yields, the sources of these yields, and the opportunities that lie ahead.
The Current State of Stablecoin Yields
In the aftermath of the Terra event, yields across the stablecoin space have been generally low, sitting well below the 3–5% range. This trend is evident across top money markets, including AAVE, Compound, Dai Savings Rate (DSR), Spark, DAI/USDC Uniswap Liquidity Pool, and Curve 3crv Pool.
Data from DeFiLlama, a leading DeFi TVL aggregator, provides a snapshot of the current rates on each platform. For instance, Compound, with a total value locked (TVL) of $142.11 million, offers an annual percentage yield (APY) of 2.90%. This yield is split into a base APY of 2.10% and a reward APY of 0.80%. Similarly, AAVE V2, with a TVL of $107 million, offers an APY of 2.59%, while Morpho Aave, with a TVL of $72.66 million, offers an APY of 2.96%. The Dai Savings Rate offers the closest APR to a high yield savings account, currently at 3.49%.
However, it’s not all gloom. Some platforms are offering higher yields. For example, Yearn Finance, with a TVL of $107.57 million, offers an impressive APY of 5.45% (however, you are taking considerable smart contract risk). Similarly, Conic Finance, with a TVL of $34.58 million, offers an APY of 11.61%, with a base APY of 0.62% and a reward APY of 10.99% (it should be noted that some Conic pools recently experienced an exploit, further emphasizing the risks associated with the higher yield options currently available in DeFi).
These figures underscore the current low-yield environment in the stablecoin space. However, they also highlight the diversity and potential opportunities in the market depending on the level of smart contract risk an investor is willing to take. Different platforms offer different yields, and savvy investors can potentially take advantage of these differences to maximize their returns.
It’s also worth noting that these yields are not static. They can fluctuate based on various factors, including market conditions, user demand, and changes in the underlying protocols. Therefore, it’s crucial for investors to stay informed and keep track of the latest developments in the stablecoin yield space.
In the next section, we will delve deeper into the sources of these yields and explore how they contribute to the overall yield landscape in the DeFi space.
Unpacking the Sources of Stablecoin Yields
In the world of DeFi, stablecoin yields primarily originate from two key sources: lending and liquidity provision on Automated Market Makers (AMMs) like Uniswap. However, a new category of yield source has emerged recently, known as Real-World Assets (RWAs), which is reshaping the yield landscape.
Lending platforms such as AAVE and Compound have been the traditional go-to sources for stablecoin yields. These platforms allow users to earn interest by lending their stablecoins to other users, who pay interest on their borrowings. The interest rates are determined by supply and demand dynamics, with higher demand for borrowing leading to higher interest rates for lenders. As of now, lending yields are hovering around 3%.
On the other hand, AMMs like Uniswap offer another avenue for earning yields. In AMMs, users can provide liquidity to trading pairs and earn fees from the trades that occur in their liquidity pool. The yield from AMMs is typically around 2%, but it can fluctuate based on trading volumes and liquidity pool sizes.
The new kid on the block, RWAs, represent an exciting development in the DeFi space. RWAs are tokenized versions of real-world assets, such as real estate or company shares, that have been brought on-chain. They offer a unique opportunity for stablecoin holders to earn yields from off-chain assets. Currently, the yield from RWAs is estimated to be around 5–7%, making them an attractive option for yield-seeking stablecoin holders.
However, it’s important to note that each of these yield sources comes with its own set of risks and considerations. For instance, lending and AMM yields are subject to smart contract risks and potential impermanent loss, while RWA yields are dependent on the performance of the underlying real-world assets. RWA yields onchain generally carry far less smart contract risk due to the yield being produced off-chain, but can carry other risks. In general, RWAs in the current landscape seem greatly underutilized when comparing the risks to the yields offered.
In the next section, we will delve deeper into the RWA opportunities in DeFi and discuss some of the key players in this space.
Exploring Real World Assets (RWA) Opportunities in DeFi
As we transition from traditional yield sources, it’s worth delving into the burgeoning world of Real World Assets (RWAs) in DeFi. RWAs are tokenized versions of real-world assets, such as real estate or company shares, that have been brought on-chain. They offer a unique opportunity for stablecoin holders to earn yields from off-chain assets.
Key players in the T Bills space include Ondo Finance, MatrixDock, RealT Tokens, Tangible, and Maple RWA. These platforms allow users to invest in tokenized versions of traditional financial instruments, earning stablecoin yields in the process.
Ondo Finance, with a total value locked (TVL) of $160.31 million, has seen a 7.10% increase in the past week, indicating a growing interest in its offerings. MatrixDock, with a TVL of $99.15 million, has also seen a slight increase of 0.38% in the same period. RealT Tokens and Tangible, with TVLs of $82.35 million and $70.53 million respectively, have also seen positive growth, with Tangible experiencing a significant 12.71% increase in the past week.
These platforms are providing a new avenue for stablecoin holders to earn yields. However, a significant limitation is that all of these platforms require Know Your Customer (KYC) procedures. This requirement introduces a barrier to entry and limits the accessibility of these platforms, contrasting with the ethos of financial inclusion that DeFi aims to promote.
The KYC requirement also makes these platforms incompatible with the decentralized nature of DeFi. This incompatibility raises important questions about the future of DeFi and the integration of real-world assets. How can DeFi platforms balance the need for regulatory compliance with the desire for decentralization and financial inclusion? How can they ensure that the benefits of DeFi, such as accessibility and financial inclusion, are not compromised?
These are some of the challenges that the DeFi community will need to address as it continues to explore the potential of RWAs. Despite these challenges, the emergence of RWAs represents an exciting development in the DeFi space, offering new opportunities for yield generation and the potential to bridge the gap between the traditional financial world and the world of DeFi.
Stacking Yields with Bloom’s Term Bound Yields (TBYs)
Bloom, the new set of products from Composable Corp, is the new set of products from Composable Corp, is the first opportunity in the market that both offers near-treasury bill yields (around 5%) derived solely from US treasuries, but offers a fully compliant non-KYC product, introducing true composability. TBYs typically yield around 5%, a figure that is already attractive in the current low-yield environment. This yield can be “stacked” with other DeFi protocols, which we will cover more on soon. We have a lot more to say about Bloom in our upcoming “Introducing Bloom” blog post. Stay tuned.
The Dawn of a New Era in Stablecoin Innovation
As we navigate through the intricate world of DeFi, it becomes increasingly clear that we are standing on the precipice of a new era in stablecoin innovation. The advent of novel yield sources, such as Real World Assets (RWAs) and Tokenized Bond Yields (TBYs), coupled with the potential for yield stacking, has transformed the stablecoin space into a vibrant landscape teeming with opportunities for both seasoned investors and newcomers alike.
While the current low-yield environment presents its own set of challenges, it has also ignited a spark of innovation and experimentation in the quest for higher returns. The DeFi community has risen to the occasion, developing groundbreaking protocols, platforms, and financial instruments that are redefining the boundaries of what is possible in the realm of stablecoin yields.
As we look to the future, the DeFi landscape is poised for continued evolution and growth. It’s an exhilarating prospect to consider how stablecoin yields will adapt and innovate in response to this dynamic environment. Will we witness the emergence of even more innovative yield sources? How will the intricate dance between traditional financial instruments and DeFi continue to unfold? How will the balance between regulatory compliance and the ethos of decentralization and financial inclusion be struck?
We believe TBYs will play a key role. You can imagine a future of yield-bearing stablecoins backed by TBYs, which can then be paired with AMMs to earn trading fees and rewards, introducing a new era of sustainable high yields across the stablecoin landscape.
One thing is certain: with the relentless pace of innovation in DeFi, the future of stablecoin yields is not just promising, it’s electrifying. We are not just observers in this evolution; we are active participants in what is undeniably an exciting time in stablecoin innovation. The future is bright, and it’s happening right now.
